April 6, 2010 - Indonesia plans to raise the cigarette excise tax, a senior industry ministry official said on Thursday, April 1st to offset lower production and further discourage smoking in the world's fifth-largest tobacco market.

The tobacco industry plays an important role in Southeast Asia's biggest economy, as it provides millions of jobs while excise taxes on cigarettes account for about 10 percent of government revenue. The big cigarette companies, including PT Hanjaya Mandala Sampoerna owned by Philip Morris International and PT Gudang Garam, have traditionally been regarded by investors as a play on domestic consumption. (Indonesia 'cash cow' for Philip Morris International..)

Indonesia set a target of 57 trillion rupiah ($6.27 billion) for revenue from cigarette excise in 2010, up from 54 trillion rupiah in 2009, reflecting the increase in excise, said Benny Wahyudi, director general for Agriculture and Chemical Industries at the Industry Ministry.

The government aims to lower cigarette production to 240 billion sticks this year, from 245 billion sticks in 2009. "The plan to lower production is part of the cigarette industry's road map to control cigarette output for health," Wahyudi said. "Efforts to lower cigarette production are by increasing cigarette excise, limiting smoking areas, banning cigarette advertising, and awareness on the impact of smoking for health," he said.

Indonesian cigarettes are among the cheapest in the world, priced at around $1 a pack.

The excise tax ranges from 65 rupiah (0.007 USD) per stick to a maximum of 320 rupiah (0.035 USD) per stick, depending on the type of cigarette and whether it is hand-rolled or machine-rolled.

If the government goes ahead with plans to increase excise and cut cigarette output, it is likely to reduce sales and profits for cigarette companies, said Yohan Setio, an analyst at PT Mandiri Sekuritas. "If it happens, cigarette firms may raise their selling price but it will be done cautiously because they need to maintain their market share," Setio said.